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LabStyle Innovations - Glucose Monitoring For The Mobile Age

Today, Zacks initiated coverage of LabStyle Innovations Corp.
(DRIO.OB) with a Buy rating. LabStyle is a healthcare technology
company that has developed an ultra-convenient, affordable, and
easy-to-use glucometer for the self-monitoring of blood glucose in
patients with type-1 or type-2 diabetes. The device, called Dario,
is of elegant design, with outstanding usability and accessibility
by integrating a pocket-sized glucometer with a smartphone and
mobile application. Dario combines a lancing mechanism, disposable
strip cartridge, and glucose monitor with attached plug for
insertion into a smartphone audio jack.

Management anticipates the commercial launch of Dario in the
European Union in the second half of 2013. A U.S. 510(k)
application as a Class-II medical device is also expected in the
second half of 2013, which if approved, could lead to the U.S.
launch in 2014. We see the Dario glucometer and diabetes management
system as revolutionary in design and function. Dario, along with
sales of disposable test strips, mobile applications, and community
and physician interaction software, represents a $1 billion peak
worldwide opportunity for LabStyle Innovations. We have built a
detailed financial model to capture this opportunity, and conclude
that the shares are worth significantly more than today. Our target
is $12 per share.

Quick Diabetes Backgrounder

Diabetes mellitus, or simply, diabetes, is a group of metabolic
diseases characterized by high blood glucose levels that result
from defects in the body's ability to produce and/or use insulin.
The defect usually stems from a dysfunction of the pancreas to
either produce insulin, or because cells do not respond to the
insulin that is produced. The primary manifestation of the disease,
high blood glucose levels, has far-reaching implications in
classical symptoms, including polyuria (frequent urination),
polydipsia (increased thirst) and polyphagia (increased
hunger).

Diabetes is classified into three broad categories: type-1
diabetes, type-2 diabetes, and gestational diabetes. A fourth
category, called pre-diabetes, is also considered important from a
clinical perspective, and may be the largest patient
population.

Type-1 Diabetes: Type-1 diabetes is usually diagnosed in
children and young adults, and was previously known as juvenile
diabetes. In type-1 diabetes, the body does not produce insulin,
most commonly the result of the body's own immune system destroying
the insulin-producing cells of the pancreas called beta cells.

Normally, the hormone insulin is secreted by the pancreas. When
you eat a meal, sugar (glucose) from food stimulates the pancreas
to release insulin. The amount that is released is proportional to
the amount that is required by the size of that particular meal.
Insulin's main role is to help move certain nutrients, mainly
sugar, into the cells of the body's tissues. Cells use sugars and
other nutrients from meals as a source of energy to function. The
amount of sugar in the blood decreases once insulin transports
sugar into the cells. In non-diabetic individuals, that signals the
beta cells in the pancreas to lower the amount of insulin secreted
so that low blood sugar, called hypoglycemia, does not develop. But
the destruction of the beta cells that occurs in patients with
type-1 diabetes disrupts this process. In people with type-1
diabetes, insulin is not available to transport sugar into the
cells. The result is that sugar builds up in the blood. A high
blood sugar level is called hyperglycemia. Hyperglycemia causes the
body's cells to starve for nutrients. Thus, other systems in the
body must provide energy for important bodily functions.

Hyperglycemia can cause dehydration due to increased urination
as the body attempts to clear the high sugar levels from the body.
Hyperglycemia may also result in weight loss due to the frequent
urination and the lack of the body's ability to take up sugar
(calories) and turn it into energy. Diabetic ketoacidosis (DKA) is
another common side-effect of frequent hyperglycemia, and results
when the body breaks down fat cells for energy in the absence of
the ability to turn sugar into energy. Fat cells contain acidic
molecules called ketones. When ketones build up in the blood, the
liver releases sugar to counter the high acid level. Unfortunately,
this only compounds the problem.

The combination of dehydration, frequent urination, and acid
build-up in the body is known as ketoacidosis. Over time,
hyperglycemia and ketoacidosis can create damage to the nerves and
small blood vessels of the eyes, kidneys, and heart. According to
the American Diabetes Association, eye problems occur in about 80%
of adults with type-1 diabetes. Kidney damage is also common,
occurring in about 20-30% of type-1 diabetes over time.

Diabetics are also predisposed to atherosclerosis of the
arteries and hypertension (high blood pressure), two major causes
of heart attack and stroke. Poor blood circulation due to hardening
of the arteries and nerve damage due to high blood glucose levels
causes problems in the feet. This can lead to increased risk of
injury and decreased ability to heal open sores and wounds, which
in turn significantly raises the risk of diabetic foot ulcers.

Type-2 Diabetes: Type-2 diabetes, once called non-insulin
dependent or adult-onset diabetes, is the most common form of
diabetes and affects approximately 90% of all diabetics in the
world. Similar to type-1 diabetes, type-2 diabetes is a metabolic
disorder that is characterized by high blood glucose in the context
of insulin resistance and relative insulin deficiency. This is in
contrast to type 1 diabetes, in which there is an absolute insulin
deficiency due to destruction of islet cells in the pancreas.
However, the symptoms of type-2 are similar, in polyuria (frequent
urination), polydipsia (increased thirst) and polyphagia (increased
hunger). Yet, unlike type-1, obesity is thought to be the primary
cause of type-2 diabetes in people who are genetically predisposed
to the disease.

Gestational Diabetes: Gestational diabetes is a condition
characterized by high blood sugar (glucose) levels that is first
recognized during pregnancy. The condition occurs in approximately
3-5% of all pregnancies, and may improve or disappear after
delivery; or it may develop into type-2 diabetes, which occurs
approximately 25% of the time.

Though it may be transient, untreated gestational diabetes can
damage the health of the fetus or mother. Risks to the baby include
macrosomia (high birth weight), congenital cardiac and central
nervous system anomalies, and skeletal muscle malformations.
Increased fetal insulin may inhibit fetal surfactant production and
cause respiratory distress syndrome. Hyperbilirubinemia may result
from red blood cell destruction.

…Treating Diabetes…

Diabetes is a chronic disease, for which there is no known cure.
The primary goal in the treatment of diabetes is management of
blood glucose control, either through diet and exercise or
medications, such as supplemental insulin or other anti-diabetic
agents. The American Diabetes Association (ADA) recommends that
diabetics check their blood glucose level daily, or more depending
on the severity of the disease. The ADA also recommends patients
check their A1C (average blood glucose control) and ketone levels.
Understanding blood sugar levels and monitoring risk factors is
paramount to maintaining stable disease.

Supplemental insulin is standard of care for type-1 and some
type-2 diabetics. There are 20+ different types of insulin sold in
the U.S. They differ in how they are made, duration of action, mode
of administration, and dosing strategy. For example, fast-acting
insulin analogues (aspart, lispro, glulsine) begin to work in 5 to
15 minutes and remain active for 3 to 4 hours. This may be ideal
immediately following a meal. Other, intermediate-acting insulins
may take 1 to 3 hours before they begin to work, but last in the
blood for 18 to 24 hours. This is useful for daily glycemic control
in patients with severe diabetes. Long and ultra-long acting
insulins (glargine, detemir, degludec) may last for longer than 24
hours and provide improved glycemic control and convenience of less
frequent dosing. Sanofi's Lantus (insulin glargine), the leading
long-acting insulin, posted sales of €4.9 billion ($6.1 billion) in
2012.

Besides insulin, there are a host of anti-diabetic medications
on the market designed to lower blood glucose levels; some of which
are oral and others which are injectable. Metformin is a
first-line, oral, anti-diabetic drug that works by suppressing
glucose production by the liver. Besides solid glycemic control and
outstanding safety and tolerability, metformin has been shown to
reduce LDL cholesterol and triglycerides, and is not associated
with weight gain. As such, it is the most widely used anti-diabetic
medication in the world. Sulfonylureas (glimepiride, glyburide) are
another widely used anti-diabetic medication. These drugs work by
stimulating insulin release by the pancreatic beta cells. The drug
has modest efficacy with a low adverse event profile, but causes
weight gain and risk of hypoglycemia. Thiazolidinediones
(pioglitazone, rosiglitazone), or TZD's for short, are oral
medications that work to reduce insulin resistance by activating
PPAR-g in fat and muscle cells. These drugs gained sizable market
share in the 2000's based on low risk of hypoglycemia and
convenient dosing. However, TZDs have been associated with
increased weight gain, edema, anemia, and increased risk of heart
failure (rosiglitazone) and bladder cancer (pioglitazone). One TZD,
troglitazone, was withdrawn from the market in 2000 because of an
increased risk of liver toxicity. The leading TZD, Takeda's Actos
(pioglitazone), posted sales of $4.5 billion in 2011.

Dipeptidyl peptidase-4 inhibitors (sitagliptin, vildagliptin,
saxagliptin, and linagliptin), or DPP-4 inhibitors for short, are a
new class of anti-diabetic agents gaining popularity due to
powerful efficacy, convenience of oral dosing, and lower potential
for weight gain. The mechanism of DPP-4 inhibitors is to increase
incretin levels (GLP-1), which inhibit glucagon release, which in
turn increases insulin secretion, decreases gastric emptying, and
decreases blood glucose levels. Several DPP-4 agents have been
co-formulated with metformin to improve glycemic control and
enhance convenience of dosing. Merck's DPP-4 inhibitor, Januvia
(sitagliptin), posted sales of $4.1 billion in 2012. A combination
Januvia + metformin product, Janumet, posted sales of another $1.7
billion. Injectable anti-diabetic agents that target a similar
pathway, GLP-1 activation, include exenatide and liraglutide. Both
agents have low risk of hypoglycemia and strong glycemic control.
For both DPP-4 inhibitors and GLP-1 agonists, safety and
tolerability remain in question.

We discuss insulin therapy and anti-diabetic agents because use
of these medications is in conjunction with lifestyle management,
which centers on diet and exercise, and the monitoring of blood
glucose, which is often performed by the diabetic patient
themselves. Self-monitoring of blood glucose (SMBG) is a key
component of the current treatment regimen for diabetes. Physicians
recommend SMBG to as a precursor to taking insulin or other
anti-diabetic medications. Taking too much insulin, or overdosing
on Actor, Januvia, or Byetta can cause hypoglycemia. Not enough,
and a patient can develop hyperglycemia and ketoacidosis. The key
to effectively using all the medications discussed above is having
timely and accurate information about blood glucose levels.

Self-Monitoring of Blood Glucose

The American Diabetes Association (ADA) notes SMBG as an
important component of modern therapy for diabetes mellitus. The
goal of SMBG is to enable maintenance of a more constant glucose
level by more precise, and in some cases, real-time information
about blood glucose levels. SMBG can be used to aid in the
adjustment of a therapeutic regimen in response to blood glucose
values and to help individuals adjust their dietary intake,
physical activity, and insulin doses to improve glycemic control on
a day-to-day basis. According to Dr. Evan M. Benjamin, MD, FACP,
Director of Healthcare Quality at Baystate Medical Center and
assistant professor at Tufts University School of Medicine,
"Judicious use of SMBG data can help to improve glycemic control,
select an anti-diabetic regimen, and provide powerful feedback to
patients wishing to improve metabolic control." In 2008, the ADA
concluded and published in its Standard of Medical Care, that blood
glucose monitoring helps in the planning of meals, activities, and
at what time of day to take medications. As a result, use of SMBG
devices has soared in the past decade. Approximately 10-20% of all
diabetics use SMBG devices, the majority of which are type-1
diabetics.

SMBG is achieved by use of a blood glucose meter, or glucometer.
A glucometer is a medical device that analyzes a small drop of
blood, obtained by pricking the skin with a lancet. The blood is
put on a small disposable test strip and then inserted into the
glucometer. A glucometer test kit includes the lancing device, the
glucometer itself, and disposable test strips. The design of
glucometers is simple and has not changed much in the past three
decades.

(click to enlarge)

Since first developed in the early 1980's, there hasn't been
much innovation in glucometers. Most all look and function the
same. Although there has been improvement in size, battery power,
testing strips, lancing device, blood sample sizes, and testing
times, the progression of glucometers over the past three decades
has been more one of evolution than revolution. Devices are getting
small, lighter, and faster, but the devices on the market today
generally operate under the same principle and mechanism as the
ones first introduced in the 1980's, only with a few more bells and
whistles.

But given the relative lack of differentiation on software and
user-experience, handheld glucometers, like the ones pictured to
the above, compete mainly on price. When consumer products begin to
complete on price, margins begin to shrink. In turn, innovation
ceases and products become ordinary. They all look and function the
same. They are not aesthetically pleasing and most are made of
cheap plastic materials with poor ergonomics and cumbersome
software.

Contrast the relatively slow evolution in handheld glucometers
of the past two to three decades with the revolution in the
cellular phone industry. Cellular phones in the 1980's and 1990's
were large, undifferentiated, cumbersome, poorly made electronic
devices. The main players, Nokia, Sony, Motorola, Ericsson, and
Telco have almost all now exited the business because they kept
making the same old poorly designed cell phones year after year.
New entrants, like Apple, Samsung, HTC, and Google revolutionized
the industry by combining quality, ergonomically designed devices,
with outstanding software that not only dramatically improved the
capability of the devices, but also improved the user experience.
Cell phones of today, now called Smartphones, are ubiquitous
devices that compete on technology, aesthetics, and emotional
attachment.

Enter Dario - Blood Glucose Monitoring For A Mobile
Age

LabStyle Innovations Corp. has developed a leap forward for
glucometers and diabetes management systems. The product, called
Dario, wipes clean the un-original thinking that plagues the bulky,
cumbersome, and uninspiring glucometers that are on the market
today. Dario is a compact, simple, elegant device that combines all
of the components of a glucometer test kit - the lancing device,
test strip and cartridge, and glucometer - with play-and-play
integration into leading smartphones on the market.

(2) Strip Cartridge: Each strip cartridge holds 25 strips. It's
easy to pull out one strip at a time (using the built in roller
that dispenses one strip at a time), and to replace the cartridge
with a new one.

(3) Meter: The meter pulls out of the Dario device and easily
connects to a smartphone headphone socket. Once connected to the
smartphone, the meter automatically syncs with the Dario
application.

Dario aims to replace stand alone, self-powered glucose meters
and kits, which often include three separate components. We see
several key advantages of the Dario device over conventional
glucometers on the market:

-
Ergonomics
: The Dario is made of high quality material with outstanding look
and feel. The entire device is roughly the size of a pack of gum,
and fits handling in the users pocket or purse.

-
Integration
: The Dario is made with the same state of the art
electro-chemical, blood-based measurement techniques as standard
glucose monitors and offers familiar usability. Dario is easily
integrated with the patient's own smartphone (play-and-play) and
accompanies application.

-
Convenience
: Dario has an integrated lancing device and disposable strip
cartridge. This eliminates the need for a separate glucose monitor,
lancing device and strip bottle and, we believe, makes Dario the
glucose device with among the smallest footprint in the market.

-
Usability
: The Dario device comes with a smartphone application (available
on iOS and Android) that launches automatically when the meter is
inserted into the headphone jack. The software application is key
to the Dario user experience. The application incorporates tools to
help diabetic patients manage their disease. We discuss the
application in greater detail below.

-
Applicability
: According to Nielsen, 55% of new cell phone buyers purchase a
smartphone. Almost half of all cell phone users own a smartphone,
with the number growing each year. There are 350 million diabetics
worldwide, 10-20% of which are insulin-dependent and test their
blood with a glucometer daily.

…The Dario Application…

Besides the Dario device, LabStyle will make Dario available
with an integrated application for smartphones (currently available
on iOS and Android). As noted above, the Dario meter works
seamlessly with the smartphone application. Dario device owners can
simply download the application and it will sync automatically with
the meter when the meter is connected via the headphone jack. The
application software creates a new ecosystem, similar to the
ecosystem that Apple (
AAPL
) has created around iTunes, that keeps the user fully connected to
the platform. Similar to the advantages of the device, the
application software offers unique advantages for the diabetic
patient:

-
Data Sync
: The application logs each activity, allowing the user to track
their blood glucose levels over time. The log provides valuable
information to the user on glycemic control throughout the day or
week or month.

-
Tools
: Beside blood glucose monitoring, the application also allows the
user to input carbohydrate and food consumption, and track
medication use and physical activity. The Dario application aims to
be an all-encompassing tool for the management of diabetes.

-
Sharing
: The application includes a cloud-based data center, allowing the
user to access the log on their desktop, tablet, phone, or send to
their physician, pharmacist, or insurance company via email.

Screen-shots of the Dario Application are seen below:

(click to enlarge)

(click to enlarge)

…The Dario Ecosystem…

Above we related the potential for LabStyle to create an
ecosystem around Dario similar to what Apple has created around the
iPhone and iTunes. Because the Dario device is so small and
compact, we expect that user compliance will be high when compared
to stand alone, self-powered glucometers that require a separate
lancing mechanism and test strips. The seamless integration with a
smartphone application that syncs via cloud-based computing to a
data center allows the user to store, track, and analyze their
blood glucose information. The data can be exported and sent (via
email) to the patient, physician, dietitian, pharmacist, insurance
company, or other care-giver.

(click to enlarge)

Similar to consumers that have either embraced the Apple or
Google smartphone platform, we believe once a user enters the Dario
ecosystem, LabStyle has the potential to hold onto the user for an
extended period of time, far beyond the typical useful life of a
self-powered glucometer. LabStyle can also capture additional
revenues from the patient through the proprietary sale of Dario
disposable test strips and patient data.

LabStyle believes its disposable test strips are among the best
strips available on the market today. The strips allow for blood
glucose readings in 5 seconds with only 0.3 ml of blood. There is
no coding involved. The Dario device utilizes an oxidase biosensor
with a wide range of analysis (10-600 mg/dl).

The Dario cartridge holds 25 test strips. LabStyle plans to be
the only supplier of these proprietary strips, and sell them direct
to consumers (online) and partner with distributors. We note the
company has contracted with a Korean supplier to supply the test
strips, connectors, and other related components of the Dario
device. We think that management will look to contract for
additional supply in time.

This kind of razor / razor blade strategy is a proven business
model that offers high margin, high customer retention. Data shows
that some type-1 diabetes test their blood up to 8-10 times a day.
LabStyle will work to gain full insurance reimbursement for the
test strips after approval, further solidifying the revenue stream
once the patient enters the Dario ecosystem.

We also see the potential for LabStyle to monetize the patient
data generated by Dario users. LabStyle expects to offer
information to contract research organizations, pharmaceutical
companies and perhaps other medical device companies to aid in
trial recruitment and market analyses, and to provide information
regarding food and exercise regimens and their effects on blood
glucose levels.

Commercializing Dario

In October 2012, LabStyle completed clinical trial to test the
usability of Dario. The goal of this trial was to facilitate
regulatory applications in Europe and the U.S. The trial was
designed to assist first time users of the Dario device to use it
under minimal guidance materials (i.e. quick user guide and iPhone
App) in an effort to demonstrate how the use of the Dario device
and related software could potentially improve patient care and
diabetic compliance. The trial also attempted to capture and
understand the potential weaknesses of the device and introduce
methods of overcoming them to the users, and to establish the
proposition that any user can operate the device compared to other
devices on the market.

The study was performed in Israel with the prototype of the
Dario product, with its basic functionalities combined with a
simulating program for the smartphone. A total of 61 patients under
varied diabetic conditions participated in the study (ages 8 to
80). The subjects were recruited from the diabetes clinic at
Wolfson Medical Center in Tel Aviv. Over 95% of the patients
completed the study.

…Regulatory Submissions…

Data from the study noted above was included in the European CE
Mark regulatory filing, which took place in the fourth quarter of
2012. For sale in Europe, the device must display a CE Mark before
they may be imported or sold and must comply with the requirements
of the European Medical Device Directive ((
MDD
)) or the Active Implantable Medical Device Directive / In Vitro
Diagnostic Directive (IVDD). LabStyle believes that Dario will be
regulated under both directives. Management will also have to
obtain International Organization for Standardization, or ISO-13485
certification. ISO is an internationally recognized quality system
and recognized by applicable authorities of an EU Member State. EU
regulators conducted the first audit of the company in October
2012, and management is currently in the process of completing
additional technical filings to be sent for examination. The
company is hoping to receive EU CE Mark certification around the
middle of 2013, with the initial launch planned for Germany and the
U.K., followed by Belgium and Scandinavia.

In the U.S., LabStyle believes that Dario will qualify as a
Class-II medical device and must comply with FDA regulations on
product design and development, pre-clinical and clinical testing,
manufacturing, labeling, storage, pre-market clearance or approval,
advertising and promotion, and sales and distribution. We believe
this makes sense given that all new glucometers are regulated in a
similar fashion. Approval of a Class-II medical device can be
accomplished through a 510(k) premarket notification application or
through a Section 515 premarket approval application ((PMA)).
LabStyle believes they will be able to file for Dario under the
shorter, less expensive, 510(k) pathway. A 510(k) submission must
provide information supporting its claim of substantial equivalence
to a predicate device. The submission will also include data from
the 61-patient study noted above.

We believe this makes sense, as the FDA permits low risk medical
devices to be marketed without requiring the manufacturer to submit
a PMA. We expect the review of the Dario device following the
510(k) submission to be quick and eventless. We expect this
submission in the second half of 2013. However, if the FDA does
require a PMA submission or regulates Dario as a Class-III medical
device (highly unlikely), LabStyle will need to conduct additional
U.S. human clinical trials to compile the necessary data. This
would add significant cost and time to the U.S. approval of the
product.

Outside the two major markets of the U.S. and EU, LabStyle may
seek to obtain regulatory clearance in certain attractive markets,
including Japan, India, South Africa, Russia, and Brazil. The
primary focus is on large market opportunities outside like Japan,
India and Brazil. With respect to Brazil, all medical devices
imported into or distributed must first be registered with the
Agência Nacional de Vigilância Sanitária, also known as ANVISA or
the National Health Surveillance Agency. However, only companies
based in Brazil can apply for ANVISA registration. Therefore,
LabStyle will have to either create a Brazilian subsidiary or
partner with a Brazilian-based third party to obtain ANVISA and
distribute Dario in Brazil.

…Marketing & Sales…

LabStyle Innovations plans to make Dario primarily an
Internet-driven product, with direct-to-consumer marketing and
distribution that seeks to reduce the reliance on traditional
retail channels. Besides being a cost-effective approach, it
eliminates the battle for shelf-shape and pricing wars that persist
when undifferentiated consumer products battle for market share at
superstores selling, soup, nuts, and Class-II medical devices. We
believe this strategy makes sense considering Dario was designed
for the "mobile age" and is coupled with a downloadable smartphone
application and a cloud-based data hosting and sharing
platform.

We suspect that, much like early-adopters of smartphones, Dario
users will be technology-oriented, device and social-media savvy,
and amenable to a potential paradigm shifting ecosystem for
managing their disease. Thus, we believe Dario lends itself well to
this type of direct to consumer, online distribution plan. The goal
for LabStyle will be to create effective brand awareness with a
significantly reduced use of our capital resources versus the
amounts required via the traditional, offline retail channels. That
being said, we do expect the company to use some aspects of
distributor networks and revenue-sharing affiliates. We suspect
these types of relationships will pay-for-performance and include
well known online commerce websites.

We expect the initial marketing will be focused on the younger
population of diabetics, then gradually broaden the marketing
efforts toward the older population, where diabetes is even more
prevalent. Management plans to initially focus on insulin dependent
(mainly type-1) diabetes patients. Market research shows that,
while this population constitutes about 10% of the diabetic patient
population, it is responsible for over 50% of the revenue from
blood glucose monitoring devices.

Intellectual Property

In May 2011, company founders filed a Patent Cooperation Treaty
(PCT) application for a "smartphone based glucose and other body
fluids content monitor" (PCT/IL2011/000369) which incorporates two
U.S. provisional patent applications submitted in 2010. These
applications and all related intellectual property were transferred
to LabStyle Innovations Corp. by company founders in October
2011.

The PCT covers the specific processes related to blood glucose
level measurement as well as more general methods of rapid tests of
body fluids. The PCT has been converted into several national phase
patent applications. With respect to PCT/IL2011/000369 for two U.S.
provisional patent applications, management claimed the patent
priority dates of September 5, 2010 for patent application no.
61/332,778 and November 1, 2011 for patent application no.
61/431,449. Management has advanced patent applications of
PCT/IL2011/000369 outside the U.S., including in Israel, Europe,
India, South Africa, Australia, China, Japan and Brazil.

With regards to company technology, management is continuing its
pursuit of patent protection and are preparing for regulatory
filings in multiple jurisdictions of both the Dario device and
related software. Management is also preparing numerous additional
patent filings related to the core technology and anticipated
future generations of the Dario product. LabStyle is in the process
of defining the final design of the initial Dario product and
continuing development of the software through both internal and
outsourced resources. In addition, management is seeking to develop
new intellectual property around future generations of Dario
hardware and software with the goal of achieving enhanced
functionality, user interface and data usability. However,
investors should keep in mind that patents have not been granted by
any of applicable regulatory authority.

Future Products

Dario and its related Intellectual Property represent a platform
for mobile rapid diagnostics. Numerous indications are noted in its
IP filings, each representing a significant opportunity. These
include blood coagulation test (PT/INR), a global market of $700M,
HIV tests and monitoring, a $1 billion opportunity, and others such
as pregnancy and cholesterol tests, each a greater than $1 billion
opportunity.

Risk - Competition

We see Dario as a significant leap forward in glucometers and
diabetes management. It is an elegant design and offers the users
an improved experience and monitoring capabilities thanks to the
software application and ecosystem that management is attempting to
build around the entire platform. That being said, LabStyle is
entering a highly entrenched market, with major market competitors,
including Roche, Bayer Healthcare, Abbott Labs, and Johnson &
Johnson all of which make cheap product alternatives backed up with
significant marketing dollars, field-based sales representatives,
insurance reimbursement, and companion therapeutic agents.

Besides these four major players, there are several small, new
entrants into the glucose monitoring market that will provide
competition for LabStyle Innovations Corp. on the device side. On
the application side, we found over two-dozen diabetes applications
in the iTunes application store (or iOS devices). LabStyle's
application is designed to work seamlessly with the Dario device.
Diabetics are free to use other diabetes applications along with
Dario and the Dario App. However, LabStyle Innovations Corp. is not
the only company seeking to capture the smartphone revolution or
utilize cloud-based computing and social media / sharing
applications to attract patients and build an ecosystem for the
patient.

…On The Device…

Dario is designed for self-monitoring of blood glucose (SMBG).
As elegant as the Dario device is, it still requires a lancing
mechanism and test strips. Several companies are working on
continuous glucose monitoring (CGM) platforms that could make SMBG
products less common, or at the very least patients with both
systems may test their blood less frequently (less sales of test
strips) than those without CGM systems. We highlight two of these
products below - neither of which we believe are "killer apps" that
will make Dario obsolete, but both do represent competition and yet
another potential paradigm shift - revolution instead of evolution
- for diabetics with complete insulin deficiency. That being said,
both the devices below will still require periodic calibration in
which the diabetic patient may use both SMBG and CGM systems.

Other companies have developed stand-alone glucometers that are
small, sleek, and work with Smartphones on the iOS or Android
operating system. However, none of these devices combined all three
components of the SMBG test kit, and most require the diabetic to
carry around an additional device besides their smartphone and
glucometer. We see the Dario device as the leading product in this
shift towards small, smarter SMBG devices. Furthermore, the
combination of cloud-based computing with App driven devices is
innovative in this segment.

Echo Therapeutics (
ECTE
) is developing the Prelude SkinPrep and Symphony iCGM device.
Prelude SkinPrep is a platform technology for painless and
significantly enhanced skin permeation. Prelude and Symphony do not
utilize a lancing mechanism and test strips. Instead, the skin is
prepared with the Prelude device to (painlessly) remove the top
layer of skin, called the stratum corneum.

The Symphony device is worn on the abdomen over the area of skin
prepared by Prelude. Symphony measures blood glucose through a
transdermal electro-chemical glucose sensor. Symphony contains a
wireless transmitter and pairs with a remote monitor, compatible
with ICU software.

Echo's Prelude SkinPrep and Symphony iCGM platform is primarily
for critical care, hospital based diabetics with complete insulin
deficiency at high risk of hypo- or hyperglycemia. Echo is
preparing to initiate its CE Mark and U.S. PMA (pivotal program)
for this platform. We do not see the Prelude / Symphony platform as
an immediate threat to LabStyle and Dario. LabStyle is years ahead
of Echo, and Echo is currently focused on the in-hospital critical
care segment. However, this first-generation product offers a
glimpse into where glucose monitoring may be headed in the next
decade.

C8 MediSensors, Inc. is developing a wearable continuous glucose
monitor that syncs with a user's smartphone. Like the Symphony
iCGM, the C8 MediSensors Optical Glucose Monitor (OGM) measures
blood glucose levels without the need for a lancing mechanism or
test strips. The device is worn against the skin and provides
painless and continuous monitoring of glucose levels with wireless
output to a smartphone. The C8 MediSensors OGM has impressive
software and integration with a downloadable application. A
potential knock on the device is the accuracy of optically reading
glucose levels through the skin, and thus C8 MediSensors is
designing the device with the notion that it will complement
convention glucometers instead of replacing them.

The other clear knock on the C8 MediSensors OGM is the bulky,
cumbersome design. The device is held in place with a belt / wrap
and Velcro. It is worn around the mid-abdomen, just above the
belly-button. The picture above depicts a relatively healthy
individual. We question the wearability of the device in patients
with higher BMI. We could see the device being hot or
uncomfortable. The device is currently investigational only. We do
not expect to see it on the market for a few years. This is a
first-generation product, and thus uptake will probably be low and
reserved for the most severe of type-1 diabetics. However, like
Echo's product, the C8 MediSensors OGM gives investors a glimpse
into where the market for SMBG is headed.

Telcare Medical Supply, Inc. has developed the Telcare BGM
device. Telcare BGM offers many of the same features that Dario
offers, including a sleek device with cloud-based data hosting
(called Telserve Hub), syncing to a mobile smartphone, data
analysis applications, and an ecosystem that aims to provide test
strips and add-on services to the patient. It requires no coding,
personalization features, a rechargeable battery, small blood
sample, and fast results.

The problem with Telcare BGM is that it is a separate device
from the user's smartphone. It even looks like a smartphone. We
question why a user would want to carry around two smartphone sized
devices, and a lancing mechanism, once Dario is on the market.
LabStyle's Dario product takes the Telcare BGM concept to the next
level. Telcare BGM is currently available in the U.S. The product
kit retails for $149.95 and includes the device, 10 lancets, and 10
test strips.

Sanofi-aventis (
SNY
) has developed a very sleek little device called the iBGStar. The
device has a dock connector compatible with iPhone or iPod Touch, a
micro-USB port for power adapter or connection to a PC, strip port,
and display area for test results. The iBGStar is designed to work
with iBGStar mobile application available on the iOS platform. The
mobile App offers only a subset features and functions of the Dario
App, allowing for analyses of test results, automatic syncing,
tracking data, storage of history data, dynamic graphing, and a
share function for family or healthcare.

The problems we see with the iBGStar are two-fold. No. 1, the
device does not contain a lancet. The iBGStar comes with a separate
lancing device about the size of a tube of lip balm. That's one
additional device that the patient must carry around compared to
the Dario. Each time you use the device, a new lancet must be
inserted along with the lancing cap. The other knock on the iBGStar
is that the dock is the old iPhone 30-pin dock for iPhone 4 or
less. It does not have the new Apple Lighting connection. Users
must purchase this adapter separately for around $30. Plus, the
iBGStar is not compatible with Android devices, which is over half
the smartphone market. The iBGStar retails for around $75 at
Walgreens, and the proprietary test strips go for around $1.30
each.

Medisana AG has developed GlucoDock, a very similar product to
Sanofi's iBGStar. We see very little differentiation between
GlucoDock and iBGStar. It has the same features and same
characteristics that will limit use, including the lack of advanced
software and lifestyle integration that the Dario has, such as a
food database and insulin dosing recommendations. GlucoDock is
currently not available in the U.S. It is available in parts of
Europe and retails for €100.

…On The Software / Application…

Many of the above products come with their own software
application that syncs with the device. The applications are free
if you buy the software, and have little utility if you don't buy
the device. Our search of the iTunes store found over two dozen
separate diabetes applications that aim to compete with the Dario
App. None will sync automatically with the device. However,
diabetics that currently have stand-alone glucometers like the
FreeStyle Mini or One Touch Ultra may have already downloaded a
separate, stand-alone application.

A recent article published in Clinical Diabetes in the Fall of
2012 (Tran et al., Vol.30:173-178) reviews several of the leading
diabetes applications available in the iTunes store. Most cost
money. We've compared these applications with the Dario App. It is
clear that LabStyle "gets it" with respect to what diabetics are
looking for in an App.

(click to enlarge)

Management at LabStyle believes the Dario App contains a number
of other unique additional features that further separates it from
the existing competition. These include a burned calories tracker,
insulin recommendation and dose calculation, the ability to
generate reports and charts, along with other measurement sharing
tools, a sugar profile plan and alert system, and the cloud-based
access to the patient data.

Market Opportunity & Sales Forecasts

LabStyle is targeting a massive market opportunity. The World
Health Organization estimates that there are approximately 350
million people with diabetes worldwide (~90% type-2 diabetics). In
Europe, the diabetic population was approximately 52.6 million in
2011 according to Frost & Sullivan, and there were
approximately 25.8 million diabetics in the U.S. in 2011 according
to the American Diabetes Association. An additional 79 million U.S.
adults have pre-diabetes, which puts them at high risk for
developing Type 2 diabetes. About 138 million adult diabetics live
in China and India and another 10 million in Russia.

The medical Journal Lancet has reported that number of worldwide
diabetics has doubled over the past thirty years. While about 70%
of the increase has been attributed to population growth and aging,
the balance was linked to changing diets, rising obesity levels and
less physical activity. Diabetes is a growing epidemic for which no
cure exists, but for which treatments (including a regimen of
frequent blood glucose testing) are available.

It is also estimated that the costs of diabetes complications
account for between 5% and 10% of total healthcare spending in the
world. Early diagnosis of warning signs and ongoing monitoring of
diabetes are the keys to the prevention and treatment of the
disease, with blood glucose monitoring being the primary method of
diagnosis and disease management, coupled with matching blood
glucose readings with food (i.e., carbohydrate) and insulin or
other medication intake. Since blood glucose self-monitoring is a
key part of managing diabetes, the market for SMBG products
required to service these many patients is also large.

According to research firm Visiongain, the global SMBG market
was $9.7 billion in 2011 and the global market for diabetes
monitoring devices is expected to be $27.42 billion by 2022. The
Enterprise Analysis Corporation has estimated that the global
market for SMBG testing supplies was $1.7 billion in 1994. By 2000,
the market had reached approximately $3.8 billion, and by 2008,
worldwide sales of these products climbed to $8.8 billion. It has
been estimated that the U.S. accounts for 40% of the SMBG market,
or approximately $3.9 billion, and Frost & Sullivan estimates
that Europe accounted for $3.97 billion in this market in 2011.

Based on the available data, the SMBG market is growing at 12%
CAGR. Key factors driving market growth include increasing diabetic
population, growing patient awareness, technological advancements
and increasing number of patients adopting blood glucose
self-monitoring. In addition, the affordable cost of blood glucose
test strips, and increase in daily monitoring, are also expected to
contribute to market growth. As such, we believe the SMBG market
represents a large and attractive opportunity for a new medical
device.

However, LabStyle will be limited upon launch by the number of
diabetics that own smartphones. In the U.S., Nielsen reports that
55% of new cell phone buyers purchased a smartphone as their new
handset. The total percent of smartphones vs. older cell phones is
approaching 50%. According to International Data Corporation, iOS
and Android control 91% of the smartphone market (as of February
2013). We also see an increasing number of patients and physicians
embracing applications for mobile health, or mHealth. According to
a 2010 study by research2guidance, smartphone applications will
enable the mHealth industry to reach 500 million of a total 1.4
billion worldwide smartphone users in 2015. An article published in
the October 2009 issue of Diabetes, Obesity and Metabolism
(Vol.11:913-930) concludes that mHealth applications have a
positive impact on the use of numerous health services and glycemic
control (Polisena et al, 2009). We believe that it is reasonable to
assume that the percentage of smartphone users with diabetes
mirrors that of the general population, and that Dario is designed
to play directly into the three trends noted above - an increasing
number of diabetes, an increasing smartphone user base, and rapid
adoption for mHealth applications.

We have built a detailed financial model to forecast sales of
the Dario device and related accessories, including the test strips
and application software add-ons. Below is a representation of our
models for the EU and U.S. We do not model sales of the Dario
device outside of the EU or U.S. as of now. We will add these
forecasts to our model upon regulatory submissions in countries
outside these regions ad hoc. For sales in Europe, we suspect that
the company will sign distribution agreements with leading medical
supplies company's on a country-by-county basis. For example, on
April 25, 2013, the company signed an exclusive distribution
agreement with Farla Medical, Inc. for distribution of Dario in the
U.K. and Belgium.

For the purpose of modeling price, we suspect that LabStyle will
essentially "give way" the Dario device to new users, at least
early in the launch, to gain market share. Similar to the "Razor /
Blade" model, the bulk of the money is made on the consumable
strips. Giving away a device that maybe retails for $75 (and costs
$25) seems counter-intuitive until you realize that the test
strips, which may sell for $0.50-$0.75 per and only cost
$0.10-$0.15 per is a far more lucrative business when we consider
the average Type-1 diabetic may use 7 strips a day.

We see meaningful uptake for LabStyle's Dario device. Sales of
glucometers and test strips are dominated by only a handful of
major players like Roche, Johnson & Johnson, Bayer Healthcare,
Abbott Labs, and Sanofi-Aventis. The big players above each hold
10-15% market share. We believe LabStyle Innovations, with Dario,
can become a major player in this area given the differentiating
characteristics of the device.

Plus, medical opinion is clearly behind improving SMBG. A paper
published in Current Medical Research and Opinion in December 2009
(Vol. 25-No.12:2903-2913) entitled, "Self-monitoring of blood
glucose in non-insulin treated patients with type 2 diabetes: a
systematic review and meta-analysis," concludes that SMBG compared
with non-SMBG is associated with a significantly improved glycaemic
control in non-insulin treated patients with type-2 diabetes. We
think LabStyle is well-positioned to take advantage of several
emerging trends, including SMBG, more Smartphone users, and
cloud-based / app-based computing.

For the European Market, we are assuming a distribution model
where the company loses a tiny amount or breaks even on the device,
and then captures a margin of around 50-60% on each strip. For the
U.S. Market, we assume more of a direct sales model where the
company loses money on the device, and then captures a margin of
around 70-80% on each strip. We assume the average Type-1 diabetic
tests 7 times a day and the average insulin-dependent Type-2 tests
3 times a day.

(click to enlarge)

We note the company is targeting developed countries with large
diabetic populations like Japan, China, India, and Brazil.
Countries in the Middle East and Russia also present significant
opportunities. Predicting market share in these countries is far
more difficult prior to the U.S. and EU launch, so we are holding
off for now with modeling sales outside the U.S. or EU. We are also
holding off on modeling sales of the application software or data
generated by the Dario users until we have a better sense of the
future plans here.

Financing Complete

On May 10, 2013, LabStyle announced it had
completed a $10 million financing
through the sale of common stock and warrants to a group of
accredited investors. The company sold 4.0 million units at $2.50
per unit, with each unit consisting of 1 share and 0.5 warrants.
The warrants are exercisable at $5.00 per share and expire in early
April 2016. Net procedure from the offering totaled roughly $9
million. We believe the company is well-capitalized to fund
operations, including the launch of Dario in the EU, for the
foreseeable future.

Initiating Coverage With Buy Rating

Zacks Small-Cap
Research
is initiating coverage of LabStyle Innovations Corp. with a Buy
rating. We think that Dario is of elegant design, with outstanding
usability and accessibility by integrating a pocket-sized
glucometer with a smartphone and mobile application. Dario combines
a lancing mechanism, disposable strip cartridge, and glucose
monitor with attached plug for insertion into a smartphone audio
jack. It is the first and only product to date that we see that
combined all three components, along with intuitive and valuable
application software. We see the Dario glucometer and diabetes
management system as revolutionary in design and function. Dario,
along with sales of disposable test strips, mobile applications,
and community and physician interaction software, represents a $500
million peak opportunity for LabStyle Innovations in both the U.S.
and EU.

(click to enlarge)

We have built an aggressive sales model for the Dario device
based on our belief that the company can capture between 5 and 10%
market share in the U.S. and EU. This seems achievable based on the
significant differentiation of the product vs. readily available,
and similarly price, glucometers today. Sales of glucometers and
test strips are dominated by only a handful of major players like
Roche, Johnson & Johnson (
JNJ
), Bayer Healthcare, Abbott Labs (ABT), and Sanofi-Aventis. The big
players above each hold 10-15% market share. We believe LabStyle
Innovations, with Dario, can become a major player in this area
given the differentiating characteristics of the device noted
above. Based on this model, we believe the shares are significantly
under-valued, and worth $12 per share.

Disclosure:
I have no positions in any stocks mentioned, and no plans to
initiate any positions within the next 72 hours. I wrote this
article myself, and it expresses my own opinions. I am not
receiving compensation for it. I have no business relationship with
any company whose stock is mentioned in this article.

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